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Can you beat the market without an information advantage?

by Robert St George on Jul 14, 2014 at 11:00

‘First, when the news is announced, shareholders cannot beat the market. It seems that the UK market is efficient as, in the post-announcement period from 28 April to 11 June 2014, the share prices appear to reflect more the probability of the bid going through and the potential synergies the bid is going to generate.’

He added that the market also seemed to be operating efficiently before there was any news, in the months before the initial discussions in November 2013.

However, he argued that ‘the efficient market hypothesis does not seem to hold in the second period’, once the private talks began in November. Even discounting the jump on the day of the public statement in April, clued-in buyers could have produced returns 30% above the index.

‘Thus even though the UK market is relatively efficient, some informed investors appear to be able to beat it and realise some transfer of wealth from the uninformed investors,’ he said.

‘Overall, the only way of beating the market is to have information that others do not have. As in anything in life, information is the name of the game.’

So how well informed is the average active manager? Data from Citywire indicates that any information advantage they possess fades over time.

The average fund in the UK All Companies sector has beaten the FTSE All Share by roughly the same margin over one, three and five years: by 11% to 9%, 33% to 30%, and 95% to 93% respectively.

But for a full decade, the average manager significantly underperforms, returning 124% compared with the index’s 135% – and even that flatters active management, given survivorship bias.

Equally, those average numbers mask a wide range of returns.

The best manager in the sector over the past three years, Citywire AAA-rated Martin Walker through his Invesco Perpetual UK Aggressive fund, has recorded more than double the average return with 73.5%.

Whether it is easier for a fund picker to identify sources of such excess returns than a stock picker is a subject for a different study.

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